Improving Patents to Spur Innovation

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318 December 23, 1983 IMPROWNG PATENTS TO SPUR INNOVATION
INTRODUCTION Many advocates of a national industrial po licy argue
that American business today is in some way incapable of the kind
of innovation that stimulated the dramatic surges in economic
devel- opment of previous generations. To compensate for this
alleged' deficiency, they continue, Congress should es tablish a
national investment bank or similar institution to channel taxpayer
re- sources into new areas.

This argument is fallacious for it assumes that Americans have
lost their spirit of inventiveness--something that must be
compensated for by a new bur eaucracy in Washington. In fact, the
blunting of America's inventive edge is due not to the lack of
government programs, but to barriers and disincentives created by
government. The tax system discourages risk taking, for instance,
and the antitrust laws d iscourage the pooling of research capacity
needed to compete on world markets. Another obstacle, often
overlooked, is that the erosion of patent protection in the U.S.
has inhibited the flow of new ideas--the seedcorn of economic
growth. If the patent law s were restored to their full strength,
America should see a dramatic increase in business innovation It is
ironic that the U.S. should be seen as falling behind in the
technology race. From the earliest days of the republic, its
economic progress has been 1inked.inextricably to technological
advance. As in no other nation, the creative mind has be,en free to
experimeyt and reach its full capacity. Time and again, Americans
hsve witnessed the birth of whole new industries founded on nothing
more tangible th an an idea. And most often these ideas were not
the result of some collective effort, but the product of inspired
individuals.

Names such as Whitney a parade of American genius 2 McCormick,
Edison, and Bell constitute that testifies to the free market's ab
ility to nurture the imagination. It is doubtful, however that
these brilliant individuals could have achieved their great
accomplishments in today's environment.

At the heart of the problem is a patent system under which
protections have been steadily eroded over the last five
decades.

Nearly 80 percent of all U.S. patents chal1enged.h court are now
overturned In other industrialized nations the ratio is
reversed.

This apparent willingness-indeed eagerness--of the U.S. court
system to overturn patents has caused many inventors to give up
even seeking patent protection, viewing it as worthless.

If innovation is to take place, the intellectual property .of
inventors clearly must be protected against unscrupulous imitations
If innovation can be encouraged, patents must once again be made
meaningful. While there is no single action that will alleviate the
ills of the patent system, there are a number of steps that shou l
d be taken immediately. These include 0 0 0 0 0 0 0 0 Elimination
of the standard of "obviousness in the whole as a basis for
challenging patents once they are granted If an idea were
llobvious,il it would have been in use at the time a patent was
issued A n amendment to the patent law containing an explicit state
ment of the principle that mere simplicity may not be taken as
evidence that a patented device is obvious A time limit in the
period of issuance of a patent during which its validity can be
challe nged, unless fraud or out right theft is proved A
prohibition on firms challenging a patent from manufactur ing the
patented item while the challenge is in process.

Criminal penalties for anyone convicted of flwillful infringe
ment" on a patent An automatic award of treble damages in civil
patent cases where infringement is proved.

Strict sanctions on foreign firms that infringe on U.S patents,
including at least a one-year suspension of their right to export
anything to the U.S. after conviction on a firs t offense, a
five-year ban on exz::orts to the U.S. for a second offense, and a
permanent ban following a third con viction.

Replacement of the current system, requiring the payment of
annuities to keep a patent in force, with a system based on fees
asses sed on the net profits earned through a patent 3 0 Exemption
of an individual inventor's proceeds from an innovation from
federal income taxation for the first ten years of the original
patent 0 An increase in the number of examiners at the Patent
Office 0 If enacted quickly, these steps would help to reverse the
erosion of patent protection. More important, they would recreate
an environment in which innovation would once again be able to
flourish Modernization of the filing system used in the Patent Offi
c e THE ORIGINS OF THE SYSTEM The roots of the British and American
patent systems stem directly from the Litterae Patentes or Letters
Patent issued by English kings. These covered everything from the
grant of an exclusive right to a process to ax-exclusive right-to
trade in a certain area.

India Company gained their charters through the issuance of
Letters Patent in the early 18th century Both the Hudson's Bay
Company and the British East The breadth of early patents
eventually gave rise to growing fears ov er their abuse, since a
patent gave its holder a monopoly on whatever process or product or
activity it covered to legal cases in 17th century England that set
forth many of the principles of current patent law. Among them are
the notion that a patent is g ranted for a limited period of time;
that it is granted in recognition of the special sacrifice, or
contribution made by the individual to whom it is issued; and, most
important that the purpose of a patent is the encouragement of'new
and use ful inventio n s within a society appreciated the value of
encouraging innovation; many of the colonies enacted statutes to
give patent protection. Patents and copyrights were a major point
of debate during the Constitutional Convention in 1787 encouraging
innovation, o n ly how best to do so This led In keeping with their
British roots, the American colonists There was no disagreement on
the notion of One view held that the'best method was by awarding a
monetary subsidy held that an exclusive franchise to investors and
au t hors was preferable. The latter position prevailed, and the
power to issue patents and copyrights was specifically enumerated
'in the Constitution. In fact, Article I, Section 8) of the
Constitution which contains this authority is the only explicit
ackno w ledgment of individual property rights to be found anywhere
in the document Another view, more in keeping with a free market
approach Another indication of the importance the new nation
attached to patents was the decision by the First Congress to
require that the Secretary of State, Secretary of War, and Attorney
General 4 personally review each application for a patent, and that
the President and the Secretary of State personally sign each one
is.sued This complicated practice soon fell into disuse, howe v er
and for the next forty years, almost all patents were granted on
application This pro forma system led to chaos, since the procedure
A new patent law was enacted in invited abuse and mistakes 1836,
creating a Patent Office in the State Department. This office is
now within the Department of Commerce CONTEIVIPORARY PATENT LAW
Although patents have always been subject to legal challenges
judicial sentiment began to turn strongly against inventors in the
1930s. to inventors amounted to an unfair restraint o f trade, and
there- fore sought to strike down patents whenever possible. As suc
cessive court decisions steadily eroded patent protection, Congress
began to take notice, In 1952 it moved to restore patent protec
tion with a new Patent Act. Under this law , a number of classes of
inventions were established and remain in force today. These
include a process, a machine, a manufacture, a composition of
matter, or a material. A basic scientific principle, however may
not be patented Some jurists felt that the m onopoly patents
granted Despite the efforts of Congress, a strong judicial bias
against inventors remains-some courts have not upheld a patent for
three decades. Many small inventors simply lack the financial
resources to mount a successful patent defense in this
atmosphere.

Faced with' legions of corporate lawyers and expensive
depositions many inventors simply give up lfObvious Inventions The
biggest problem is with simple inventions, because it is easy for
would-be imitators to argue that they are "obvi ous11 and therefore
should not be protected by a patent. Among the examples of a patent
being overturned on this basis was the "weed eat.er a device that
employed a thin plastic line in place of a blade to trim grass and
hedges. Invented by a Texas real e s tate developer who was duly
issued a patent, the weed eater was held l*obviousit by a
California judge when the inventor challenged a number of firms
which had infringed on his patent. But while the idea was
undoubtedly simple, to suggest that it was obvi o us was a serious
2binterpretation of the language in Section 103 of the 1'952 Patent
Act, which states A patent may not be obtained...if the differences
between the subject matter sought to be patented and the prior are
such that the subject matter as a w h ole would have been obvious
at the time the invention was made to a person having ordinary
skill in the art to which said subject matter pertains 5 The
invention*of the telephone, the lightbulb, and the cotton gin
probably would not have withstood this te s t in today's courts
Patent Theft Another major problem with contemporary enforcement of
patents is the light penalties imposed in those rare cases when a
patent challenge actually succeeds the inventor fully compensated
for the loss of income incurred not to mention legal fees. Even
when juries are sympathetic to the inventor's case, awards are
often reduced to nominal levels on appeal. This encourages the
unscrupulous firm to chance infringing the patent rather than to
pay royalties cases the legal fees a nd damages-if they are
amended-are less than paying royalties Foreign firms are especially
inclined to infringe on patents.

Unless an inventor has filed for patents abroad, as well as
within the U.S., he may find that he has no case whatsoever when he
chal lenges a foreign firm. Moreover, he has little recourse in the
U.S. court system to stop infringements. This problem is
particularly severe in the case of Far East imitations, when U.S
goods are counterfeited exactly and exported to America, where they
co m pete with the goods of the pirated firms In virtually no
instance is In most REFORMING TRE PATENT LAW Closing Loopholes for
Theft To close loopholes that allow the unscrupulous to infringe At
the very on patented devices and processes, the "obviousness of the
whole'l standard should be eliminated in court challenges least
what constitutes 'lobviousnessll must be clarified.

The very notion of obviousness is highly questionable device or
a process were obvious, it presumably would have come into common
use. The fact that it is not should be taken as evidence that it is
not obvious. But if obviousness is retained as a standard, the law
should contain an explicit statement specifying that simplicity in
and of itself should not be taken as evidence that a devic e is
obvious strike down patents on the obvious test should be required
to state in their decisions how they arrived at that conclusion is
easy to conclude that something is obvious once it is explained in
court testimony of such an explanation, the invent o r's idea was
self-evident to manufacture or use a disputed device while a
challenge is taking place tage, because he lacks the resources to
cornpet with a large imitator during litigation. Since a patent is
assumed to be If a In addition, judges who It Bu t tLnt does not
mean that, in the 'absence A second loophole to be closed concerns
firms that continue This puts the small inventor at a great
disadvan 6 I valid unless overturned in court, the inventor's
rights should be protected while his patent is in l itigation.
Enjoining those firms challenging the patent from manufacturing the
disputed device would recognize this principle and put the inventor
on a more even footing with the challenger.

There should also be a time limit on the period during which a
challenge can be filed. Such a limit would prevent firms from
waiting to see if a device is successful in the market, and then
infringing the patent.

Disincentives for Willful Infringement Disincentives should be
created to discourage willful in fringement of patents.

Observes one successful inventor If you steal a hubcap off my
car valued at over $75, you can go to jail for up to five years.
Yet if you steal my intellectual property worth hundreds of
millions of dollars, the odds are that you will escape w ith
impunity if convicted, or at least suffer relatively little
economic hardship." Time and time again, inventors have learned
this painful lesson. They have relatively little recourse under the
law if their intellectual property is stolen. Indeed, some firms
make a business of stealing inventions rather than innovating.

To stop this, tough criminal and civil penalties should be
imposed for patent theft patent theft as a felony similar to grand
theft. Where willful infringement is proved, the penalties for the
responsible indi viduals should be at least as severe as other
forms of grand theft--say five years in prison and a heavy fine
with even stiffer It would only be necessary to classify 11
punishment for additional offenses. Such penalties would make I1 I
patent pirates hesitate before preying on the small inventor.

Wh en infringement occurs, but is not clearly willful, heavy
civil penalities should be assessed. An automatic award of treble
damages might be appropriate inventors to continue to pursue
litigation in support of their patents fringement takes place
overseas , it is difficult to extradite the responsible officials.
Therefore, foreign firms accused' of willful patent infringement
should be liable to the possible suspension of import licenses for
all products exported to the U.S. The licenses could be lifted for
one year on c:onviction for a first offense, five years for a
second offense, and permanently for a third offense. Since the
sanction would cover all items the firms concerned sold in America,
it would constitute an enormous disincentive to infringement d i
fficult at best, the courts' should have the right,to sequester
This would also encourage Foreign. firms pose a more difficult
problem. If the in I Since recovering damages from foreign firms
can sometimes be 7 all of a foreign firm's U.S. holdings after d
amages are awarded in a patent case until the damages are paid,
regardless of the amount in question. Since the damages in any
patent case would likely be of far less value than the U.S. assets
of any large firm, this would be a powerful inducement to the
foreign firm to pay the assessed damages to the inventor.

CREATING AN ENVIRONMENT FOR INNOVATION Infringement penalties,
in combination with the closing of loopholes, would help restore
patent protections to the level the Founding Fathers intended
restore completely the environment of innovation needed to ensure
America's economically dynamic future A series of incentives and
modifications of present policies are also needed to encourage
innovation But such penalties are not enough to Temporary Income
Tax Exemption Though a number of circumstances characterized the
golden era of innovation in America, the most important was the
simple fact that an inventor was able to reap the full rewards of
his invention. This was due in part to the absence of a federal i
ncome tax. Such taxes probably are the greatest disincentive to
productivity because they punish success. The greater the finan
cial performance of an individual, the greater the tax burden on
that individual. The modern Edison, Bell, or McCormick receive s
only partial proceeds of his genius The income tax is particularly
damaging in the case of innovation, for it frustrates the ideas
needed to create new industries and therefore new jobs. Because job
growth increases the revenue flowing into the federal t reasury,
innovation that is discouraged by the federal income tax reduces
treasury receipts.

Worse still, the federal tax bite on the proceeds of a
successful invention diverts capital from its development and
marketing.

One can only wonder how many inventions never reached the market
place because federal income taxation made them unprofitable in the
crucial early years.

There thus is a strong argument for exempting from federal tax
at least the initial proceeds earned by an inventor on his or her
patent , say for ten years. The inventor would then have a greater
pool of available capital to invest in the invention, and would
have a much greater incentive to press on despite heavy financial
burdens and risk. The loss to the federal treasury from forgone t a
xes would be minimal compared with the new taxes paid by
individuals employed in the manufacture and marketing of the new
device or.process. Moreover, such an exemption would be fully
consistent with the desire of the Founding Fathers to encourage
innovat i on without a direct payment from the federal government.
a Financinq the Patent Office Another step that could be taken to
improve the present system, while addressing the issue of how to
finance the Patent Office if patent proceeds were exempt from taxat
i on, would be to change the system of annuities required to keep a
patent in force At present, inventors have to make substantial
periodic payments to the Patent Office to keep their patents valid.
This penalizes inventions that take a long time to market o r are
only marginally successful. It also tends to discourage individuals
from seeking patents It would be fairer to base the payment on a
percentage of the.proceeds an inventor realizes from his invention.
This payment might be credited against federal i n come taxes, if a
tax exemption were not given. This percentage would be set at a
level sufficient to cover the costs of operating the office. In
effect the Patent Office would be sharing the proceeds of the
patent in return for the protection it provides.

Patent Office Modernization A final change would be to upgrade
and modernize the Patent Office filing system and to increase the
number of patent examiners The delay in examining applications and
awarding patents has grown longer over the years, as the co
mplexity of searches has increased before the computer. It is
ironic that the office most concerned with technology cshould be so
far behind the rest of the nation in applying the processes it
patents improved efficiency that would accrue from a moderniza t
ion of the filing system. First, inadvertent omissions of "prior
art as previously filed patents are called) would be minimized.
Second, sophisticated computer filing systems could aid patent
examiners in making patent determinations in highly complex tec h
nology cases that would be held valid. The costly, discourag ing
time lag between patent applications and determinations would be
reduced Yet the Patent Office still operates much as it did There
are a number of important benefits, in addition to Addition al
examiners would also allow greater specialization.

Science and technology grow more complex every day, and some of
the archaic designations and classifications used in the U.S patent
system do not accurately reflect, this. Specialist examiners would
per mit a more modern system of classifications, and thereby
strengthen he patents that are issued CONCLUSION The U.S. is facing
a crisis in innovation that threatens the nation's long-term
economic prospects. The root of the crisis is a patent system that
ca n only be-described as a shambles patent is no longer worth the
paper it is printed on A U.S 9 Fortunately the crisis can be
resolved with quick remedial action. But this action should not be
the creation of a national fund for innovation last people to tu r
n to for inspired commercial ideas. Instead attention should focus
on improving the climate for innovation through changes in the tax
law and regulation and by strengthening the patent system If these
steps are taken, America's greatest resource, the free minds of
free men working in a free economy will assure continued progress
and growth If not, the future may be very dark indeed Experience
shows that bureaucrats are the Milton R. Copulos Policy Analyst